Tuesday, November 25, 2008

Need Sobering Clarity On Malaysia

For the past 3 months we have heard many differing calls and views on the Malaysian economy in the face of the global financial turmoil. We have to be careful on what people are saying and their roles. Many of those who are the most vocal have vested interest, namely politicians and real estate developers. We have to regard those statements with a few bucket loads of salt.

I can understand it when property guys stay optimistic, they had to, you think they have any choice. No property guy will come out to say that they are doomed, they will first be lynched by fellow property players. There is probably an unwritten code among property players, when you have nothing good to say, shut up cause the rest are trying to reduce their inventory as fast as they can.

I would like to see a more sobering comment and leadership from the top politicians and top financial people in government institutions such as Bank Negara, MIER and even RAM and the like. I am not asking for them to give pessimistic views, I am asking them for clarity and realistic views. Do not try and instill a false sense of confidence in the people. I know that the rule book would call for a need to keep an optimistic view so that domestic consumption stays strong, but I also believe that a realistic view would help restore confidence that the people would know the government is handling the issue properly, and more importantly has a good handle on the issues we are facing. Time for sobering leadership.

Things are crumbling in the US and much of Europe. Many nations are already in a recession statistically, even some Asian countries. Malaysia is not in that boat (yet), but we also need to know why we are not there (yet). Is that inevitable? Can we dodge the bullet? Or are we deluding ourselves?

This is not 1997, it is not a financial crisis in our own backyard, hence we should not and will not feel the effects firsthand. For my life I cannot understand how those people out there can say Malaysia will not be affected or will be only marginally affected by this crisis. We will be affected because:

a) We do not have a big enough or strong enough domestic economy. If we had a population of maybe 80m-100m and domestic consumption makes up 65%-75% of our economy, maybe we can ride it out, but we are not.

b) If the turmoil is a short one, e.g. if the US and Europe will come out of this with positive growth by 2Q or 3Q 2009, then we can safely say we might only be marginally affected, but that is not the case here.

c) Our major trading partners are the US, China and Singapore. Of that, maybe China can still chug along and save us, but we are not supplying the right products in their enlarged fiscal stimulus (rail and infrastructure). We are rerouting a lot of exports normally to the US to China as partially finished products to be assembled or finished in China for exports. Well, some 60%-70% of China exports are really MNCs funded manufacturing / outsourcing concerns operating out of China - I don't think they will be unaffected.

Oil and CPO prices have crashed, and both help to boost our coffers. CPO prices affects CPO companies rather than the bulk of the population, hence we do not see great wealth effects when CPO is at RM3,000 and we will also not feel it that much if it goes to RM1,200. Oil would affect government coffers and the ability to fund our budget deficit. Some would scream that we are at a highish 4.8% deficit, but I am actually comfortable with that.

RM7bn stimulus is OK but will not be sufficient. I hope the government will add to it with another RM5bn at least, this time do it with a 2 percentage points cut in income tax. I know that will hurt government receipts but its a time to go further into deficit spending as the alternative is not nice.
The other recommended measure is for the government to totally pay up on all bills and claims for work done within 2 weeks of invoice receipt. Governments (including state governments should lead the way to pay all bills, we all know that many bills are left unpaid or delayed for the longest time, bickering over amounts and maybe something else to happen... the trickle down effect will be substantive.

One big factor causing people to think things are hunky-dory in Malaysia is the stubborn property prices. I still think things will hit hard in the coming months when property prices start to come down. Property prices are already down substantially (about 15%-20%) in Singapore and Australia - granted thats also because the leverage and speculation there have been more rampant. The good thing is that speculation has been not as rampant in local property but that does not mean we are immune.

The biggest job losses will be in Penang with the high number manufacturing firms there, and watch the trickle down contraction. Oil and CPO price collapse does not hit jobs that much as the number of employees needed to run an oil company are not critical, or rather the revenue/employee is very high. Plus even at US$50, its still profitable and many suppliers and contractors are on long term contracts anyway. As for CPO, well, we know their cost is still around RM650-750 and you still need people to tend to plantations.

For impact, just take a minute to reflect on your job, how much does your company rely on strong foreign demand, how much does your company rely on domestic demand, now look at the demand outlook from both sides 3 months out and then 6 months out. Now take two of your close friends in different jobs, do the same exercise ... maybe you will have a better idea now.

Malaysia relies a lot on foreign investment and that will dry up over the next few quarters. Thankfully, Bank Negara has maintained good discipline and our reserves are at an enviable level, thus allowing the country many options to deal with this crisis better than many countries. For those who does not like a weak ringgit above 3.60 vs the USD, grow up, in times of global turmoil I'd rather have a weakened currency to maintain better competitiveness. A strong ringgit would have seen more industries collapsing outright. Plus we are in a deflationary environment, hence a weaker ringgit won't be importing inflation.

Lastly, while the stockmarket has lost substantial ground over the past 12 months, this time around the bulk of retail players have been able to sidestep the fall and is in fact quite cashed up. Nonetheless Malaysia has one of the highest percentage of GDP that is listed and stock prices have a large correlation to domestic consumption, we have yet to see the wealth effect coming through.

Do not be blinkered in that we have not yet seen the effects, by virtue of the makeup of this crisis, it will only hit us with a 3-6 month delayed effect.

p/s photo: JJ


easystar said...

Hi Salvatore,

Pretty good analysis and that put the decoupling nonsense further out of the window.

One thing I do not agree is currency manipulation of weak ringgit. Malaysian industry needs to wake up and be more efficient rather than relying on cheap currency. Recession is part of a business cycle that causes businesses to look hard at their business and to emerge stronger (or go bust).

Malaysian workers and companies are hugely inefficient, to get 10% efficiency would not be hard at all (vs a 10% mnipulation of Ringgit)

ONI said...

RM will be weaker with the reduction of OPR by BNM yesterday. Maybe it will go back to the old RM3.8 to $1 soon.

Tunku said...

Decoupling nonsens it is. BUT your arrangement of concern is NOT quite right. US demand for consumer goods will virtually collapse as the US deleverage, you can bet on it. BUT the other issue is China will move up the value chain over the next few years which means that over the medium term, our main export of electronics should collapse. Oil and palm oil prices should rise again once credit resumes buffering the problem. What it really means? Private sector is screwed big time and statism gets bigger which spells trouble in the long term.. There is really only one cure and that is removal of NEP...

yj said...

well, it seems to us that yoga is more important than financial crisis at the moment, perhaps we can "bend" our way out of this crisis ? u shld stay longer in US...Black Fri Sales....!!!

Gamelion said...

Sometimes it is very difficult to tell the truth when the truth itself will clash/conflict with personal interest , therefore the intention to convey the messages are not very clear and mostly are protected with double talk when one's is wrong !!

richard said...

I totally agree with Easystar regarding weak ringgit.
I believe in the long run a strong ringgit would be better for the country as we still need a lot of capital goods for infraworks and so for until the day we can produce some of our own capital goods for export.
Think about it. We have cheap ringgit for years now and we still are in square one.

Salvatore_Dali said...

easystar, richard,

I think I need to clarify my views on the ringgit... if you read my blog in the past you would know that I favour a strong ringgit as we have had an artificially weak one for far too long, keeping too many mundane industries alive... a stronger ringgit would help us move up the value chain and remove the sunset industries.. I am arguing that in the current turmoil where uncertainty reigns, where huge job losses is a big likelihood, its better to keep competitiveness while there is so much uncertainty ... we should have a strong ringgit when things are normal, not test the stress level of economy when things are so shaky.. thats all... there is no need to have a strong ringgit now... when things are on the medn and Dow is above 10,000 ... plenty of time to do structural improvements when the environment is more conducive... you do not want to play with fire inside a burning building

easystar said...

Hi Salvatore,

I read a few years back (when US was sliding and GaveKal took a different view), that competitive devaluations of currencies among exporters were a real possibilty.

And now looks like indeed it is..

see said...

Aiyo, Dali, how to have stronger ringgit and climb higher value chain when they importing Indons & Banglas by the busloads. The ringgit never went back to good ol days of RM2.50 to a USD. Shopping in mere Singapore more expensive. We need some serious structural reforms together with political will.

Jasonred79 said...

... our stock market, bulk of retailers managed to get out?
What are you talking about Dali???

The way the stock market works is, there are ALWAYS XXXX number of shares floating around.

The only difference is who is holding them.

If some retailers sell their shares... other retailers or instituitions have to buy them.

Malek said...


importing indons/banglas is one way for businesses to remain competitive. you would like to eat cheap w/ good service but how can be cheap if the waiters are expensive?

show me a malaysian wanted to work for RM500 FULL TIME waiting tables and i'll show you the restaurant that employs it.

but i still miss the good old days of RM2.50 on the dollar.

easystar said...

Hi Malek,

The solution is self service and automation. There is one cool London restaurant that uses overhead projection (like those you see in Singapore Takashimaya City) to project menu on the table (and with lots of additional features) so that the number of waiting staffs can be cut down.

But obviously low skills job only contribute to a small chunk of GDP. In many other industries, layers of managers, dead woods etc are bigger problems.

Malek said...


that cool restaurant in london or singapore, can i have a drink and snack under RM5? can it fit 50 people who want snacks for less than RM5?

i admit, firing people is difficult if ur a permanent staff. changing labour laws isn't exactly on top of our MP list right now. BN or PR.

easystar said...

Hi Malek,

They don't. But that is not the point - it is about looking for automation in low skills industries, rather than constantly relying on cheap foreign labour.

This includes plantation, processings etc.